Some Venture Capitalists Need To Blame Themselves, Not The Economy

I keep seeing reports, like this one on the New York Times blog, entitled "Venture Capitalists’ Confidence Plummets to an All-Time Low." Of course, many VCs want to simply blame the current economy and point their finger at the global financial troubles taking place for the reason their investments may not be looking so hot. And while some VCs are legit in saying that, to me, it seems a vast majority of them should be blaming themselves, and not the economy.

I speak to many VCs and while some of them are very knowledgeable of the market and product vertical they are investing in, many aren’t. Some have no idea how big the market opportunity it, who the major competitors are and what their product offerings look like for the industry they are investing in. How many times have we seen VCs give a large chunk of money to someone who has no real business model, no business experience, yet says they have really great technology so that’s why they invested. And I’m not talking about the content delivery business here. Think about what we saw two years ago in the UGC market, or what we’ve seen in regards to the number of "Internet TV Platforms" who have raise a lot of capital, but have almost no revenue.

Lately, companies have been coming out of the woodwork approaching me about new compression technology they have, new codecs etc… all of whom have already gotten lots of money, but literally have no idea how they are going to turn their technology into a business. All they keep wanting to talk about is their technology without the understanding that it is worth nothing if they don’t have a way to monetize it. Or they say things like, "my technology is going to compete with Flash". Ok, good luck.

Of course, we have seen this before. Many VCs are making multiple bets and hoping some of their investments pay off to help cover the ones that don’t. I understand that is how the game is played. But the idea that many VCs simply point to the economy as the sole reason why they have no confidence in any industry is wrong. VCs need to start doing a better job of truly understanding the market opportunity and competitive landscape they are investing in. The most common responses I get from VCs when I ask them why they invested into a particular company is usually, "the founders have great technical backgrounds", "many of the executives have PhD’s", or "they have the best technology we have seen". What about the business experience of the executives, the market opportunity for the product/service and the business model for the company?

  • Rob

    Virtually all VC’s invest based on a forumula. Despite lofty and usually pompous web sites claiming “vision” and “outside the box thinking” nothing could be further from the truth. The usual model is a Harvard MBA who doesn’t understand the technology, that is making a decision based on a valuation model. Nothing wrong with that but let’s not pretend it is anything else.
    The other big factor is what sectors the overall VC market is investing in, e.g. suddenly every VC was “green”. This is why you see so many CDN investments. No VC wants to be left out of a possible windfall. It is also why you see so many stupid deals right now.

  • Stream Steve

    There seem to be three types of deals which make no sense (independent of the market). First, relationship deals — Founders know the venture partner, and the rest is history. Second, repeat entrepreneur syndrome — clear what that means, but the percentage of first time founders succeeding is significantly higher than repeat founders. Third, the herd effect — mentioned by Rob. Until ideas are evaluated based on fundamentals, I think VC’s will find excuses. First it was the Internet bubble, then it was Sarbanes etal to blame, then the world economic order. Are VC’s running out of excuses?